“How China Escaped the Poverty Trap” by Yuen Yuen Ang

One of the defining debates in economic development theory is one of chicken-and-egg: whether good institutions and governance are needed for markets and growth, or vice versa.

Yuen Yuen Ang set out to explain China’s recent growth and realized that neither model held; instead, she found that “development is a coevolutionary process”, i.e.

States and markets interact and adapt to each other, changing mutually over time. Neither economic growth nor good governance comes first in development.

Will all due respect to the considerable effort and rigor that has gone into the rest of the HowChina Escaped the Poverty Trap, the point—once stated—seems almost self-evident, at least as far as China is concerned. China started its current rise with neither markets nor institutions; both developed, and are arguably still developing, in lockstep.

Ang is not the first to point out that traditional Western economic and political theory, assumptions and approaches tend to run aground when it encounters Asia. Joe Studwell made similar observations about other Asian countries in How Asia Works.

Ang meticulously describes a process that combines central direction, local innovation, continual re-evaluation: she calls the interaction between markets and institutions “co-evolutionary”. Deng Xiaoping described it with rather fewer words as “crossing the river by feeling the stones”, but it nevertheless seems to waited for Ang to conceptualize a theoretical framework and document it; she does both in considerable detail.

HowChina Escaped the Poverty Trap provides an eminently plausible description of the process by which China escaped (or perhaps is still escaping) the poverty trap, many of the individual pieces of which—for example, the “flying geese” pattern of development, in which the coast developed first and then passed investment inland—will be familiar to those who follow China news in the papers.

But it is less clear that her “China model” of “directed improvisation”, as she calls it, extends beyond the descriptive to also be predictive or prescriptive. Bi-directional causality is, for practical purposes, little different from no causality at all. Perhaps this is why predictions about China’s future vary from collapse to world hegemony. Ang asks, but does not answer, the question whether this model is scalable to “suit an era of sprawling government objectives”.

With regard to applicability beyond China, one needs to consider whether China is a special case. There are several reasons why it might be: it is very large and diverse and so, even when underdeveloped, it had extensive resources to call upon if it wished. Further, while China may have lacked institutions, it had a relatively strong state. Finally, China’s recent growth isn’t so much development as restoration of a status quo ante: there was a lot of history to draw upon when the time was ready.

Ang makes a game—and at one level convincing—attempt to retrofit her explanation to economic development in late Medieval and early-modern Europe and the pre-Civil War United States: both started without much in the way of either institutions or markets so, she argues, the process must also have been “co-evolutionary”. However, these might also have been special cases in much the same way as China was. Nor do these cases themselves definitively identify why the model, or development, took root in some places and not others.

Ang’s overview of the development landscape omits the Socialist model. The USSR, it is now forgotten, developed both rapidly and for a period at least as long as China’s current period of growth. The Soviet Union was for several decades seen as an alternative model and had it been able to transition to freer markets in the last quarter of the century, we might now be hailing the role of massive central capital allocation, which is almost the complete opposite of Angs controlled ad hoc-ery, as the route to economic development.

Discussions about economic models potentially suffer from a sort of survivor bias. Given China’s size and intrinsic wealth, its economic development is hardly a surprise. The real question may not be how it developed and escaped the poverty trap but instead why it found itself there.

HowChina Escaped the Poverty Trap is positioned as an academic book; Ang discusses the literature and the theoretical state of play. Laymen might well respond as did the local Chinese bureaucrats to whom she asked whether “it was effective governance that led to growth or growth that enabled governance to improve?” They were, she writes, “consistently astonished by the naiveté of the question.” But it’s a good thing she asked.